Regulatory View of DSM/EE David Drooz Public Staff – N.C. Utilities Commission April 2015

Definitions DSM = “Demand Side Management” In NC, this means reducing electricity demand during times of peak demand Benefit is savings of “capacity” measured in megawatts (MW) EE = “Energy Efficiency” In NC, this means using less electricity to achieve the same function Benefit is savings of “energy” measured in megawatt hours (MWh) Jargon Alert!!! These terms mean different things outside of NC law. Other terms include “demand response,” “demand side,” “conservation”

Legal Origin: 2007 “Senate Bill 3” Requires utilities to meet a portion of energy needs through renewables and energy efficiency 3% by % by % by % by 2021 and beyond Specific percentages for solar, swine waste, poultry waste Up to 25% can be from EE until 2021, then it is up to 40% Allows for annual cost recovery riders

Achievements through 2013* Renewable Energy MWh in 2013% of Retail Sales Solar 396, Wind Biomass (Agric., Landfill, etc.) 2,426, Swine1, Poultry25, Hydro1,004, Other (tires, CoGen) 1,168, Total Energy Efficiency 718, *2014 data likely will be considerably higher. Measurement methodology affects numbers. E.g, whether to include RECs from outside NC.

Context: DSM/EE within Utility Planning Integrated Resource Plans estimate future demand and how to meet it with the “least cost” combination of: New supply side resources (generating units) Demand side resources (DSM peak shaving of capacity and EE reduction of energy) Other: transmission and distribution; smart grid enhancements; pollutions controls

Source: 2014 Integrated Resource Plan for DEC – Docket No. E-100, Sub 141

Special ratemaking for DSM/EE “decouples” revenues from energy sales Otherwise, utility has disincentive as efficiency would mean less sales and therefore less revenues Annual rider proceeding for DSM/EE instead of waiting for general rate case

How it works - I Cost recovery “Mechanisms” are approved for Duke, Progress, and Dominion The Mechanisms allow Recovery of costs incurred to run the DSM/EE programs Recovery of “net lost revenues” for the first 36 months (this is the decoupling) Recovery of a “performance incentive” to reward the utility

How it works – II (consumer protections) Programs are only approved for implementation if they are expected to be “cost effective” -- meaning benefits are greater than costs Utility performance incentive is only allowed if “cost effectiveness” is achieved Utility incentive is about 11-13% percent of net savings achieved, so utility benefits only if customers benefit Rates are “trued-up” so that actual experience corrects any error in estimations Third-party “Evaluation, Measurement, and Verification” is performed to validate DSM and EE savings (benefits)

How it works – III “Cost effectiveness” is measured under various tests that are nationally accepted but still debated. Each test is a ratio of benefits to costs, with a score greater than 1.0 being cost effective. “Utility Cost Test” is ratio of (1) the benefit of utility’s avoided costs (what it would have cost to build and operate a peaking unit, and deliver its energy, in the absence of DSM or EE) to (2) the cost of the DSM or EE program. This test reflects the planning process from the utility viewpoint – is it less costly to invest in new generation or to deploy EE? The UCT does NOT consider Net Lost Revenues or utility incentives in the calculation of costs. In NC, the utility incentive is calculated as a percentage of net benefits under the UCT (continued on next slide)

How it works – III continued “Total Resource Cost” Test is ratio of (1) the benefit of utility’s avoided costs (what it would have cost to build and operate a peaking unit, and deliver its energy, in the absence of DSM or EE) to (2) the utility’s cost of the DSM or EE program and the participants’ costs. This test reflects the costs from all stakeholders (utility and participants). Utility incentive payments to participants are not considered a “cost” as they are just a transfer from one stakeholder to another. The TRC does NOT consider Net Lost Revenues or the utility’s incentive in the calculation of costs. In NC, the TRC is used to screen programs for approval.

How it works – III continued “Ratepayer Impact Measure” Test is the UCT plus Net Lost Revenues are added to the costs. This test reflects the costs for all ratepayers, not just the participants. Most EE programs do not pass the RIM test; however The Commission still considers RIM results when reviewing programs. Bottom line: in NC, utilities are rewarded for DSM/EE as long as the programs are more cost effective to the utility than building generation. Individual customers may have higher or lower bills as a result. The cost effectiveness tests do NOT account for “societal” benefits.

Current DSM & EE Programs Duke Progress Residential Home Advantage Residential Home Energy Improvement Residential New Construction Neighborhood Energy Saver Low Income EE Lighting Appliance Recycling My Home Energy Report CIG EE Multi-Family EE EE Education Small Business EE EnergyWise CIG Demand Response DSDR Duke Energy Carolinas Residential Energy Assessment EE Appliances & Devices HVAC EE Income Qualified EE Appliance Recycling My Home Energy Report Multi-Family EE EE Education Small Business EE Smart Energy in Offices Power Manager Non-Residential Smart $aver Custom Energy Assessment, Food Service, HVAC, IT, Lighting, Process Equipment, Pumps & Drives, & Custom Power Share Dominion NC Power Residential Low Income Residential Duct Testing & Sealing Residential Home Energy Check Up Residential Heat Pump Tune Up Residential Heat Pump Upgrade Non-Residential Energy Audit Non-Residential Duct Testing & Sealing Non-Residential Lighting Non-Residential Heating & Cooling Non-Residential Window Film Residential Air Conditioning Cycling

Final thoughts NC utilities recently stated that their “avoided costs” have declined. This will reduce the value of renewable energy and DSM/EE. The case is pending before the Commission. The “low hanging fruit” for DSM/EE is disappearing. It may be harder for new programs to establish as much cost effectiveness as old programs. But there may also be untapped potential for new DSM/EE. Baselines used to determine program savings are changing, which also lowers cost effectiveness. NC law allows industrial and large commercial customers to “opt out” of DSM/EE riders. This limits the potential for overall DSM/EE savings. EPA’s Clean Power Program may increase the value of DSM/EE. Growth in DSM/EE also depends on utility and regulator “buy-in.”